Policy Proposal by: Wang Yang, Cai Wensheng, Lei Zhibin, Wen Yizhou

As the global digital asset market is growing rapidly, the Hong Kong Special Administrative Region government is actively promoting the development of digital assets and the digital economy. This effort stands in stark contrast to the gradual strengthening of digital asset policies in other countries and regions, such as the United States and Singapore. Hong Kong has showcased its acceptance and openness towards the digital asset market to the world. In this context, stablecoins, which serve as a bridge between traditional finance and the digital economy, have become an important topic in Hong Kong’s pursuit of digital asset development. Stablecoins play an indispensable role in the digital financial ecosystem. Issuing a stablecoin pegged to the Hong Kong dollar not only helps to solidify Hong Kong’s leadership in the blockchain sector but also propels the progress of the digital Hong Kong dollar, enhancing transaction efficiency, reducing transaction costs, improving current payment systems, and further strengthening Hong Kong’s fintech capabilities. Moreover, the Hong Kong Dollar stablecoin can enhance the efficiency and inclusiveness of Hong Kong’s financial system; its stability, freedom of exchange, high security, openness, and cross-border liquidity can support a wider range of financial innovations. The introduction of the Hong Kong Dollar stablecoin will undoubtedly inject new vitality into Hong Kong’s economy, helping to enhance Hong Kong’s competitiveness in the digital economy era.

However, the SAR government’s current plan is limited to allowing and encouraging private institutions to issue Hong Kong Dollar stablecoins. In our view, this measure is too conservative and does not align with the SAR government’s ambitious agenda for promoting digital assets and the digital economy. Hong Kong Dollar stablecoins issued by private institutions are unlikely to gain significant market share and may eventually become a marginalized product. The Singapore Dollar stablecoin (XSGD) issued by Xfers serves as an example, with a market capitalization of only 6.6 million USD, whereas the market capitalizations of USDT and USDC have reached 83 billion and 28 billion USD, respectively. A stablecoin of the scale of XSGD cannot challenge the dominant position of the US Dollar stablecoins. Hong Kong must have higher aspirations and determination on this issue.

Therefore, we strongly urge the SAR government to issue a Hong Kong Dollar stablecoin backed by Hong Kong’s foreign exchange reserves (referred to as HKDG, where G stands for Government). The government-backed Hong Kong Dollar stablecoin will have dual safeguards: on the one hand, benefiting from government regulation; on the other hand, benefiting from the transparency and immutability provided by blockchain contracts. This innovative policy direction will provide strong support for Hong Kong’s leadership in the digital financial field.

Strengthening Hong Kong’s Blockchain Leadership

As of March 2023, Hong Kong’s foreign exchange reserves amounted to 430 billion USD, significantly surpassing the combined market capitalization of USDT and USDC of 120 billion USD. In contrast, HKDG backed by the SAR government will have higher credibility and lower risk. Especially as the credibility of USDT remains in question, and USDC has recently experienced severe discounts, HKDG has the potential to challenge the monopoly of the US Dollar stablecoins and become a mainstream stablecoin in the blockchain and digital asset ecosystem. Besides, issuing HKDG brings many other advantages:

Taking a Substantial Step towards De-dollarization: Admittedly, HKDG alone is unlikely to shake the hegemony of the US Dollar. However, with the rapid development of the blockchain and digital asset ecosystem, a strong HKDG can challenge the dominance of the US Dollar in this ecosystem, thereby de-dollarizing in substance.

Providing Additional Liquidity to Aid Government Investment Projects: The issuance of HKDG can not only provide a large amount of additional liquidity but also further expand Hong Kong’s foreign exchange reserves. This increased liquidity will further enhance the efficiency of the financial markets. The additional liquidity can be used to reduce government debt, providing more financial space for infrastructure and industrial development. HKDG can be used in government financial investment plans to reduce project operating costs.

Realizing Digitalization of Traditional Trillion-Dollar Assets in Hong Kong: HKDG can assist in the digitization of Hong Kong’s traditional assets, thereby increasing the scope of traditional asset business, liquidity, low-cost transactions, and transparency. Digital assets open up a wider range of application scenarios and usage methods, while driving the optimization of financial services, allowing more people to participate in financial industry transactions and purchases. This transformation can not only strengthen Hong Kong’s position as an international financial center, enhance its liquidity and influence, but also bring new vitality and opportunities to Hong Kong’s digital economy.

Easier Supervision and Risk Management: The government-issued HKDG is easier to monitor and manage risks compared to those issued by private institutions. The government’s direct supervision of the issuance and circulation of HKDG can enhance the effectiveness of monetary policy implementation and the consistency of Hong Kong’s financial stability and technical specifications. In addition, the government can flexibly manage according to market conditions and policy needs to maintain its value stability. The government has the responsibility and ability to protect the interests of HKDG holders, ensuring that its value is not violated. Compared to private institutions that may bear commercial risks, the government is better able to comply with relevant regulations and strictly monitor the flow of funds when dealing with issues such as money laundering.

Promoting Financial Innovation: The government’s support and regulation will aid the development of HKDG, encourage financial innovation, and attract more blockchain, digital currency, especially Web3 related enterprises and projects to Hong Kong, to promote Hong Kong as a global Web3 innovation center. HKDG can provide strong competition for the Hong Kong dollar in the global market, bring differentiated quality financial services to the market, provide an advanced technology platform, quality service, prudent regulatory environment, and promote healthy competition. Hong Kong, as an important free trade port and international financial center of our country, can significantly reduce the cost of digital asset transactions and cross-border payments, providing more convenient and safer financial services for the real economy.

Enhancing Competitiveness in the Digital Economy Era

Supporting the National Key Development Strategy: HKDG can solve the obstacles to trade and investment cooperation in international collaboration caused by monetary policy and trade restrictions. One potential application is that HKDG can provide a simpler, more convenient, and reliable method for capital circulation and improve capital utilization efficiency for the “Belt and Road” initiative. Blockchain technology can eliminate redundant steps in traditional transactions, reduce transaction costs, and its open and transparent record-keeping and tracking methods can imbue transactions with greater information content and trustworthiness, further attracting international investment. In the promotion and application in countries along the “Belt and Road”, the use of HKDG can not only push Hong Kong’s innovative technology and related services, but also enhance Hong Kong’s international competitiveness.

Although the HKDG issued by the Hong Kong government has multiple advantages, we should still be aware of its potential risks. Firstly, the challenges will be met in the legal and regulatory aspect, such as cross-border transactions may involve the legal and regulatory standards of multiple countries. If any illegal financial activities, money laundering, and terrorist financing problems are associated with it, it may lead to international disputes. Technical risks, such as hacker attacks and system failures, cannot be ignored. Besides, large-scale exchange demands may cause short-term fluctuations in the exchange rate of the Hong Kong dollar.

However, despite these risks, the risks borne by the government-issued HKDG are significantly lower than those of the Hong Kong Dollar stablecoin issued by private institutions. The government’s strong fiscal strength and abundant foreign exchange reserves far exceed private institutions. Moreover, as a sovereign entity, the government has more credibility, and the motives and goals of issuing stablecoins are more transparent. At the same time, a government-endorsed HKDG will help attract Hong Kong’s private and state-owned enterprises to participate in the stablecoin market, further enriching the application scenarios of stablecoins, and integrating the cooperation of state-owned financial institutions with non-state-owned financial innovation enterprises and the exploration of stablecoin payment systems and other fintech trends into the stablecoin trend of the global powers. After considering all these risks, the benefits of the SAR government issuing HKDG outweigh the disadvantages.

Therefore, we advocate that the SAR government should issue a Hong Kong Dollar stablecoin backed by Hong Kong’s foreign exchange reserves to promote fintech innovation, enhance the competitiveness of the financial market, optimize the use of foreign exchange reserves, and take a substantial step towards de-dollarization. Only in this way can Hong Kong maintain a competitive advantage in the era of the digital economy.

The authors are respectively the Vice Chancellor of the Hong Kong University of Science and Technology and Chief Scientific Advisor of the Hong Kong web3.0 Association; a renowned angel investor; founder of Web3.0 technology company BlockCity; Ph.D. student at the Hong Kong University of Science and Technology.

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